Brownfield Redevelopment: A review of funding available to developers in Michigan and Minnesota

Early development took place around industry.  With deindustrialization, many of these sites now sit vacant, underused, and unused.  In many instances, these locations are still considered critical to a city’s economic vitality.  They are critical to the future success of economic development in the city. 

Traditionally banks are leery of financing a development that lacks sufficient equity, such as former industrial sites.  These brownfield sites present complications not inherent in greenfield (prior undeveloped land) developments.  Federal legislation has made it difficult for banks to economically loan money to developers for actual or suspect contaminated sites.  The national Comprehensive Environmental Response, Liability, and Compensation Act (CERCLA) places strict liability of a site on the current owners of contaminated property (Moe 684).  This has made brownfield sites less attractive and in many cases not viable for development.  In some cases, even being near a current of former contaminated site is enough to scare the banks away.  States and municipalities are beginning to recognize these barriers and are adjusting their liability laws to make them more amenable to the parties of the redevelopment process.

Beginning in the late 1980’s the brownfield development horizon in Minnesota changed forever.  Amendments to Minnesota Environmental Response and Liability Act (MERLA) limits an owners’ liability through assurances by the EPA Region 5 that they will not pursue a formally contaminated site except for reasons of eminent danger (Zachman 246).  This has created an atmosphere where developers and their financing engines are comfortable undertaking these more risky brownfield developments.  Michigan has made similar changes to their laws as well.  The amendments to the Michigan Environmental Response Act (MERA) changed the liability structure for environmental contamination (Trigger 661).

Brownfield sites are more costly to develop than traditional greenfield sites and private capital has remained at an arms distance.  Changes in the laws of Michigan and Minnesota is reducing the attendant liability placed on the current owners and/or developers and has created an environment whereby private developers are willing and able to redevelop the site and put it back into productive re-use.  By reducing the liability for present and future contamination, the sites have become candidates for traditional bank financing.

Discussion of Works Cited

Moe (2002) highlights brownfield financial incentives in relation to the favorable liability legislation recently instituted in Minnesota.  The state has established several avenues for funding brownfield redevelopment, such as hazardous waste TIFs, loans, and grants (Moe 689).  Also, spurred by requests for reductions in real estate taxes, the Minnesota legislature created the contamination tax (Moe 688).  The contamination tax reduces property taxes for properties owned by someone not responsible under MERLA for the contamination (Moe 688).  Together these incentives are significant enough to generate private development interests in the state as evidenced by the two successful case studies in the Zachman and Steinwell article.

Zachman and Steinwell (2001) discuss brownfield development success stories that used Tax Increment Finance (TIF) in Minnesota.  Using two redevelopment sites near the Twin Cities, they were able to illustrate the complexities of private development of contaminated and formerly contaminated urban sites.  As the cost for redeveloping inner city sites rose, developers reached further out into agricultural land for cheap development opportunities putting undue pressures on many public services such as transportation and utilities.  Using TIFs administered by local municipalities, developers are able to capture future taxes to pay for the current costs of redeveloping a contaminated site.  TIF dollars can be used to finance redevelopment of blighted areas, to provide money for an affordability strategy, soil remediation costs, the cleanup of hazardous substances, and for the redevelopment of mined underground spaces (Zachman 246). 

Trigger (2002) highlights the expansion of the government incentive packages in Michigan to spur brownfield redevelopments.  By legislative order, municipalities can establish Brownfield Redevelopment Authorities (BRA) that facilitates brownfield development in their local communities (Trigger 654).  The BRA develops a Brownfield Plan whose purpose is to identify eligible redevelopment properties and outlines the activities that will be covered with the subsidy (Trigger 655).  Government subsidies can be in any or all of the following forms:  Tax Increment Financing, Local Site Remediation Revolving Funds, and Single Business Tax (SBT) Credits.  Tax Increment Financing captures the additional tax revenues because the project proceeded.  They can be used for the project itself, to fund a revolving fund, and to pay administrative and operating expenses of the BRA.  The revolving fund monies come from excess TIF and can be used for preparation of the Baseline Environmental Assessment (BEA), due care activities, and additional response activities under the Brownfield Plan.  The SBT credit is a one time tax break equal to 10% of the cost of on site improvements on a contaminated site up to $30 million (Trigger 654-661).

Bartsch and Wells (2005) outline the many states that are now offering various forms of direct and indirect financial assistance to aid in the financing process.  In 1996, the State of Michigan established Brownfield Redevelopment Authorities (BRA) to help fund developments (Bartsch et al 17).  These authorities allow local municipalities to create TIF districts to capture future revenue streams that otherwise would not have been realized and to establish a Local Site Remediation Revolving Fund to cover expenses on other sites within its jurisdiction (Bartsch et al 17).  They can adopt Brownfield Plans to identify the eligible activities to be conducted on the property and allow for the use of TIF’s (Bartsch et al 17).  The TIF can be used to pay for “eligible environmental response and redevelopment activities at the site” (Bartsch et al 17).  The state also allows for a one time Single Business Tax (SBT) Brownfield Redevelopment Credit to be used for “investments made at an eligible property included in a brownfield plan” (Bartsch et al 18).  The credit can cover up to “10% of any innocent party’s development (not cleanup) costs, up to $1 million” (Bartsch et al 18).  In communities that have created an Obsolete Property Rehabilitation District, property owners can receive an “abatement of up to 100% of real property taxes for a brownfield site for up to 12 years” (Bartsch et al 18).

Simons (2002) introduces the concept of the brownfield finance “gap.”  This is the difference between the total project cost minus available debt and equity.  This gap must be filled from outside traditional financing streams (Simons 100).  To accurately determine the true gap, the developer should first determine the total project cost before applying public subsidies (Simons 101).  Simons puts forth several options to close the funding gap (listed in chronological order).  First, when the gap is very large they should try to negotiate a lower purchase price.  Second, seek government redevelopment subsidies.  Third, capture funds from the original contaminator.  Fourth, an historic insurance policy may cover some of the cost of environmental cleanup.  Simons notes that a recent case study (not named) of thirteen brownfield projects revealed the average cost of brownfield remediation to be about 10% while government subsidies typically run 15 – 20% (Simons 102).  There should be sufficient funds to remediate and rehabilitate the site when all sources are taken into account.  Public monies available may come in the form of grants or loans (Simons 102-103).  But not all free money is in monetary form; additional sources are in-kind services and tax breaks (Simons 102).

Bartsch and Wells (2003) also use the term ‘financing gap’ to define the difference between project cost and all available private monies for brownfield sites but seek to more narrowly characterize the problem by identifying the stages that typically lack financing: early stage site assessment, remediation plan definition, and cleanup implementation.  Because brownfield sites present additional development challenges, private capital has stayed away from these risky investments.  In order to create economically viable redevelopment sites, the investors require a higher rate of return than they normally would at a greenfield site (Bartsch et al 17). 

Conclusion

Michigan and Minnesota are at the forefront of minimizing the financing gap through government financing programs such as TIF and revolving funds.  Because brownfield sites have particular problems being funded in their early stages, including initial site assessment, defining the remediation plan, and carrying out the cleanup process (Bartsch et al 17) they have traditionally been passed over for easier greenfield developments that offer a higher rate of return.  This has been changing drastically over the last five to ten years as liability laws have been refined and relaxed with regards to the amount of liability put on the current owner.  Brownfield redevelopment projects are simply “worthy real estate problems with excess site preparation cost” (Simons 115).  Even if a site does not have enough money for redevelopment it may be a great redevelopment opportunity.  The challenge is to think beyond traditional real estate revenue streams; to find that creative finance method(s) that makes the project feasible.

But are these government programs and subsidies enough to spark widespread economic development in distressed inner cities?  Why is the knowledge base among private developers still lacking to support mass amounts of brownfield redevelopment?  What can be done to educate more developers about the opportunities that exist with brownfield redevelopment projects?

Works Cited

Bartsch, Charles and Barbara Wells.  (April 2005).  State Brownfield Financing Tools and Strategies.  Northeast-Midwest Institute. 

Bartsch, Charles and Barbara Wells.  (June 2003).  Financing Strategies for Brownfield Cleanup and Redevelopment.  Northeast-Midwest Institute.

Moe, Paul S.  (2002).  “Minnesota” in Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property, 2^nd ed.  American Bar Association.

Simons, Robert A.  (2002).  “Creative Financing of Brownfield Sites” in Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property, 2^nd ed.  American Bar Association.

Trigger, Grant R.  (2002).  “Michigan” in Brownfields: A Comprehensive Guide to Redeveloping Contaminated Property, 2^nd ed.  American Bar Association.

Zachman, Jeff and Susan D. Steinwell.  (2001).  “The Use of Tax Increment Financing in Redeveloping Brownfields in Minnesota” in C. L. Johnson and J. Y. Man Tax Increment Financing and Economic Development: Uses, Structure and Impacts  SUNY Press.